CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
Portfolio P has a return of 16%, beta of 1.25 and standard deviation of 20%. The risk-free rate is 6%. What is the Treynor ratio of Portfolio P (in percentage points of excess return per unit of beta)?
The Treynor ratio is 8.0. Excess return is 16% minus 6% = 10%, and dividing by the beta of 1.25 gives 8 percentage points per unit of systematic risk. Using standard deviation instead would give the Sharpe ratio, which is a different measure.
- A8.0Correct
- B0.50
- C10.0
- D12.8
Explanation
Treynor ratio = (Rp - Rf) / beta = (16 - 6) / 1.25 = 10/1.25 = 8.0. The option 0.50 is the Sharpe ratio (10/20), which uses standard deviation instead of beta. The option 10.0 omits dividing by beta, and 12.8 is 16/1.25, which forgets to deduct the risk-free rate.
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